Request for Internal Advice No. 92-27; 9802.00.50; Repairs; Packaging Materials; Packing Costs; Expenses incurred "in this country"; Tooling; Salaries

HQ W556656 September 12, 1992 CLA-2 CO:R:C:S W556656 RAH TARIFF NO.: 9802.00.50 District Director U.S. Customs Service Lincoln Juarez Bridge, Building #2 P.O. Box 3130 Laredo, Texas 78044-3130 RE: Request for Internal Advice No. 92-27; 9802.00.50; Repairs; Packaging Materials; Packing Costs; Expenses incurred "in this country"; Tooling; Salaries Dear Sir: This is in response to your memorandum of April 10, 1992, forwarding a Request for Internal Advice submitted by Mr. Robert A. Calandra of the law firm of Sandler, Travis and Rosenberg, P.A., on behalf of American Telephone & Telegraph Company ("AT&T"). FACTS: AT&T exports from the United States defective corded telephones, cordless telephones and answering systems to repair facilities in Mexico. Support materials include various tools and equipment used by the repair facilities in the repair operations, which fall into two categories: tools – e.g., utility knives, soldering iron tips, hand tools, buffing wheels, machine tool replacement parts. equipment - e.g., cleaning cloths, gloves, rubber bands, tape, respirators, safety glasses, earplugs, printer ribbons, brushes, cotton swabs, solder, alcohol, glue, solvent, buffing compound, detergent, and other charges related to the equipment. Some support materials contribute directly to the repair operations and other support materials do not.  The support materials are purchased by the Mexican repair facilities from unrelated vendors in the United States and Mexico. The repair facilities subsequently bill AT&T for these materials. One of the repair facilities includes a fixed amount per unit for support materials on the invoices and periodically issues a supplemental bill for actual costs incurred for support materials. Another repair facility simply issues a bill on a quarterly basis for all support materials purchased (that facility issues their bill to a U.S. office of their parent company, which adds a 5% handling fee and invoices AT&T). Counsel contends that the support materials are not a part of the value of the repairs and requests that since AT&T has already paid duty on the value of the support materials, the unliquidated entries should be liquidated with refunds. Additionally, Mr. Calandra states that his client has been entering foreign packing materials as part of the dutiable value of telecommunications equipment exported to Mexico for repairs and returned under subheading 9802.00.50, Harmonized Tariff Schedule of the United States (HTSUS). Mr. Calandra seeks approval for AT&T to enter the foreign packing material as non­ dutiable pursuant to Headquarters Ruling Letter 544015 (HRL) dated March 20, 1989. When the repaired telephones are returned to the United States, they are packed three or four units per master export carton, depending on the model. The outer export carton is brown corrugated cardboard of U.S. origin. If a telephone was "initially defective" it is packed in a colored "pretty box" for retail sale. The "pretty boxes" are made in the Far East. If a telephone was "customer owned," it is packed in a plain brown cardboard box of U.S. origin. Both types of individual cartons contain cardboard inserts to hold the telephone in place and cushion it. Other packing materials include polybags, wire ties, labels, envelopes, tape, and leaflets. All materials are of U.S. origin. AT&T so pays the salaries of several persons (third-party contract employees) who work in the Mexican repair facilities and perform quality control functions.  ISSUE: Whether packaging materials, packing costs, tools, equipment and the salaries {paid by AT&T) of third-party contract employees who perform quality control functions are considered part of the cost or value of the dutiable repairs under subheading 9802.00.50, HTSUS. LAW AND ANALYSIS: Subheading 9802.00.50, HTSUS, provides a partial duty exemption for articles returned to the United States after having been exported to be advanced in value or improved in condition by means of repairs or alterations. Such articles are dutiable only upon the value of the foreign repairs or alterations, provided the documentary requirements of section 10.8, Customs Regulations (19 CFR 10.8), are satisfied. U.S. Note 3, subchapter II, Chapter 98, HTSUS, provides, in part, as follows: The value of repairs, alterations, processing or other change in condition outside the United States shall be: the cost to the importer of such change; or if no charge is made, the value of such change, as set out in the invoice and entry papers; except that, if the appraiser concludes that the amount so set out does not represent a reasonable cost or value, then the value of the change shall be determined in accordance with section 402 of the Tariff Act of 1930, as amended. Section 10.8(1), Customs Regulations (19 CFR 10.8 (1), provides, in part that: (t)he cost or fair market value ... which is to be set forth in the invoice and entry papers as the basis for the assessment of duty under subheading 9802.00.50, HTSUS, shall be limited to the cost or value of the repairs or alterations actually performed abroad, which will include all domestic and foreign articles furnished for the repairs and alterations, but shall not include any of the expenses incurred in this country whether by way of engineering cost, preparation of plans or specification, and furnishing of tools or equipment for doing the repairs or alteration abroad or·:otherwise. ( Emphasis added). We held in HRL 544015, supra, that costs incurred in packing and loading repaired blade shafts and transporting them from the repair facility to the exporting carrier is not dutiable under subheading 9802.00.50, HTSUS, as part of the value of the foreign repairs, as evidenced by section 10.8(1), Customs Regulations (19 CFR 10.8(1)), which limits the duty assessed under that subheading to the repairs actually performed abroad. Generally, the value of non-reusable foreign packing materials or containers normally used for packing such goods is considered a part of the value of its contents and is dutiable at the rate of its contents. See, General Rule of Interpretation 5(b), HTSUS. That rule, however, is not applicable to subheading 9802.00.50, because, under that subheading, duty is assessed only on the cost or value of the repairs actually performed abroad to the article and not on the appraised value of the article itself. Therefore, because the packing materials are not part of the repairs, they are not subject to duty under subheading 9802.00.50, HTSUS. Additionally, you contend that since AT&T ultimately "incurs" all the expenses in the United States in connection with the support materials, that the expenses for tools and equipment should not comprise a part of the repairs. You urge that the expenses in question are "incurred in this country" regardless of whether AT&A purchases the support materials and provides them or simply pays the company in Mexico to purchase them. You argue that if we conclude it is the location of the vendor which determines whether an expense is "incurred in this country" then all tools and equipment purchased by the Mexican repair facility from a U.S. vendor would be non-dutiable. The scope of the phrase "incurred in this country" was addressed in the case of United States v. Douglas Aircraft Co., 510 F.2d 1387 (1975), an appeal from the judgement of the U.S. Customs Court, 72 Cust. ct. 10, c.o. 4498, 370 F. Supp. 1404 (1974), which involved appraisement of the processing of a wing assembly and tail assembly which were exported from the United States to Canada for processing and then returned to the United States for further processing. Included in the dutiable value determined by Customs for the processing in Canada was an amount for the pro rata share of the cost of Canadian-made tooling which the importer contended it furnished the Canadian processor [the tools were not shipped from the United States but were paid for by the importer in the United States]. The lower court held that the value of processing for purposes of item 806.30, Tariff Schedules of the United States (TSUS) (the predecessor to subheading 9802.00.60, HTSUS), is the "cost to the importer" which simply means the amount "charged" by the foreign processor. That court relied on National Tube Co. v. United States, 28 Cust. Ct. 603, Reap. Dec. 8107 (1952), for its further conclusion that a distinction between tooling expenses incurred in the United States and those incurred outside the United States is unjustified. The Court of Appeals reversed that decision and found that the substance of the regulation was first promulgated as T.D. 54192 on September 22, 1976 (21 Fed. Reg. 7212), and the language specifically excluding any of the expenses in this country (including tools for doing the processing) has continued ever since. 19 C.F.R. 10.9(1) (1974). Id. at 1392. [The regulation discussed in Douglas (19 CFR 10.9) is, for purposes of assessment of duty, identical to the regulation in question (19 CFR 10.8(1)). The court went on to say that the plain meaning of the regulation is that only expenses in this country are excluded (a meaning supported by the maxim expressio unius est exclusion alterius). The appellate Court therefore concluded that foreign-made tooling paid for by the importer [but not actually purchased in the U.S.) should be taken into account in determining the value of processing outside the United States. See also, HRL 541994 dated September 13, 1979 (despite fact that charges were paid for by the U.S. manufacturer, the expenses for insurance, depreciation on leasehold improvements and Haitian counsel fees are incurred outside the United States). Based on the foregoing, the value of repairs includes all domestic and foreign articles furnished for use in the actual repairs unless such articles are purchased (incurred) in this country by the importer and furnished (exported) to the repair facility. Accordingly, the support materials (tools and equipment) purchased by the Mexican repair facility either from a U.S. or Mexican vendor and charged to the importer constitute dutiable repairs under subheading 9802.00.50, HTSUS, to the extent that the materials are actually used in the repair process. Additionally, you contend that the cost to pay the third party contract employees who work in the Mexican facility is not included in the dutiable value of the repairs. You cite HRL 542412 dated March 27, 1983 (a case pertaining to item 807, Tariff Schedules of the United States (TSUS)). For purposes of item 806.20, TSUS (predecessor to subheading 9802.00.50, HTSUS), we have held that regardless of where an employee is hired or paid, if he performs services in repair of the article, then the expenses are not incurred in the United States, and the costs attributable to the foreign services are dutiable. HRLs 544023 dated October 26, 1987, and 541994 dated September 13, 1979. Therefore, because the services provided by the third party contractor are actually performed in Mexico, such expenses are dutiable under subheading 9802.00.50, HTSUS, as part of the value of the repairs.  HOLDING: The value of repairs under subheading 9802.00.50, HTSUS, includes the cost or value of support materials (tools and equipment) purchased by the Mexican repair facility either from a U.S. or Mexican vendor and charged to the importer to the extent that these materials are actually used in the repair process. Moreover, the cost of services provided by third party contractors who perform services in Mexico which are related to the repairs also are included in the dutiable value of the repairs. However, the cost of packing materials is not dutiable under subheading 9802.00.50, HTSUS, as part of the repairs to telecommunications equipment exported to Mexico for that purpose, as they are not part of the repairs actually performed in that country. Sincerely, John Durant, Director Commercial Rulings Division